To stay solvent, businesses require money. Your business will struggle to succeed even with strong sales if it doesn’t have the cash to operate. However, examining your company’s cash flow status requires more effort than checking your bank account. Liquidity can be used as a metric to assess their capacity to meet short-term financial obligations. It serves as a gauge of your company’s capacity to turn assets—or anything else it owns with a monetary value—into cash. It is quick and simple to turn liquid assets into cash.
What is Company’s Ability to pay
A company’s ability to pay its short-term liabilities—those that are due in less than a year—is measured by its liquidity. For instance, you may determine that you have enough cash on hand to cover all of your anticipated expenses by looking at your current and future obligations. Or you could decide that you need to use additional assets and investments that can be turned into cash. The more liquid an asset is, the simpler it is to turn it into cash.
Why is Liquidity Important?
The investments and assets that your business possesses have financial value. And liquidity refers to how soon, should the need arise, you can access this money. Here are a few reasons why it matters to businesses.
- Tracks the financial health of your business: You can learn about your company’s current financial performance and future financial planning by measuring liquidity.
- Liquidity Planning fills the gaps between when the business might run out of cash to pay for anticipated obligations: This involves coordinating the bills you anticipate receiving and the invoices you anticipate sending via accounts receivable and accounts payable.
- Provides visibility for possible future investments or business expansion. When doing liquidity planning, you’ll also be keeping an eye out for times when you might anticipate having extra money that could be used toward other investments or business expansion.
How can a CFO help with liquidity?
The existence of economic uncertainty may cause you to continue to experience capital pressure in your company. Maintaining a steady flow of cash is very essential in order to satisfy unplanned obligations and pay for unanticipated expenses. When something like this takes place, it is the task of the Chief Financial Officer (CFO) to develop plans that will both increase the amount of money coming in and keep the amount of money going out under control so that the company may have the greatest amount of liquidity possible.